Impact of purchasing investment property before first home
Member since 2022 · 17 posts · 7 votes
Hello,
My partner and I want to get started on rental properties (~$200k, out of state, multi-family), but are also looking to buy our home in the next year or so ($800k+) in SoCal.
What kind of impact will having a rental property (and therefore the associated debt) have on our ability to finance our home? For reference, we have 800+ credit scores and combined make about $350k/year.
Should we buy our first house before exploring rental properties?
Thanks!
Buying an investment property prior to buying your first home is not a problem.
The lender will give you credit for the rental income on your investment property, which means that the debt associated with that property will have little to no impact on your debt-to-income ratio.
Max DTI ratio is going to be ~45% when you go to buy your primary in SoCal.
If you're making $350k per year, that is $29,166 per month.
Assuming you put 20% down on your new $800k home, and assuming rates are around 6.5%, your mortgage payment will be ~$5,000 per month when you include taxes and insurance (taxes are high out there in SoCal!)
$5,000 / $29,166 = 17.14% front end debt-to-income rate.
Hello,
My partner and I want to get started on rental properties (~$200k, out of state, multi-family), but are also looking to buy our home in the next year or so ($800k+) in SoCal.
What kind of impact will having a rental property (and therefore the associated debt) have on our ability to finance our home? For reference, we have 800+ credit scores and combined make about $350k/year.
Should we buy our first house before exploring rental properties?
Thanks!
Consider house hacking. Buy a 4 unit and live in it for 1 year then a triplex and so on then refinance your investments and buy your home with much less out of pocket and have steady cashflow coming in.
If not, then putting +25% down on investment property should not interfere with you getting a 3-5% down conventional for your personal home. The only concern would be your debt to income ratio. Check with lenders in your area to see what ratio they would like to see and it will help determine if buying your investment property first would be a good idea.
Buying an investment property prior to buying your first home is not a problem.
The lender will give you credit for the rental income on your investment property, which means that the debt associated with that property will have little to no impact on your debt-to-income ratio.
Max DTI ratio is going to be ~45% when you go to buy your primary in SoCal.
If you're making $350k per year, that is $29,166 per month.
Assuming you put 20% down on your new $800k home, and assuming rates are around 6.5%, your mortgage payment will be ~$5,000 per month when you include taxes and insurance (taxes are high out there in SoCal!)
$5,000 / $29,166 = 17.14% front end debt-to-income rate.
@Michael Hunt Hmmm, there's a little more to this than meets the eye. The posts above are correct with that we want to work with a lender that uses the rental income to help us qualify but there's a little nuance thing to what you are saying. Let' me explain some if you don't mind:
1. A commercial/portfolio/DSCR style loan will lend to your business entity. Your partnership/LLC is the actual borrower. This means that loan is NOT under your name. The property would ALSO not be under your name - but rather the company name. However, to go this route you MAY have a little higher rate (or some other feature that may not be as attractive as a "conventional" loan). Don't get dissuaded by this. Use this loan type. This is the preferred loan type if you are in a partnership with someone on real estate since you will be splitting profits according to your partnership. I'm saying it like this because...
2. A conventional loan (from Fannie Mae or Freddie Mac) will put the loan in your personal name. The property will be in your personal name. That doesn't sound like that big of a difference except that they hold 100% of the payment against you. Even if you have multiple borrowers, ALL borrowers have 100% of the payment held against them. This is a big problem if you are splitting the profits. You'll have 100% of the debt....but only 50% of the profits. It will look like you are taking a loss.
So even though that commercial loan route might seem a little more negative with the rate or prepayment penalty or whatever, that's the route you will want to go.
Now when it comes time to get your own, primary home - going conventional is fine! That's no issue, there's no profits to split or anything like that with your primary home. So going with a traditional loan on your primary home is no problem just as long as that investment property is structured properly.
I hope all of that makes sense.
Buying an investment property prior to buying your first home is not a problem.
The lender will give you credit for the rental income on your investment property, which means that the debt associated with that property will have little to no impact on your debt-to-income ratio.
Max DTI ratio is going to be ~45% when you go to buy your primary in SoCal.
If you're making $350k per year, that is $29,166 per month.
Assuming you put 20% down on your new $800k home, and assuming rates are around 6.5%, your mortgage payment will be ~$5,000 per month when you include taxes and insurance (taxes are high out there in SoCal!)
$5,000 / $29,166 = 17.14% front end debt-to-income rate.
Thanks for the insightful response, Scott. I should've probably clarified that the multi-family I'm considering is a duplex, not a commercial property. Would I still be able to get credit for the rental income if that's the case?
Thanks again!
@Michael Hunt Hmmm, there's a little more to this than meets the eye. The posts above are correct with that we want to work with a lender that uses the rental income to help us qualify but there's a little nuance thing to what you are saying. Let' me explain some if you don't mind:
1. A commercial/portfolio/DSCR style loan will lend to your business entity. Your partnership/LLC is the actual borrower. This means that loan is NOT under your name. The property would ALSO not be under your name - but rather the company name. However, to go this route you MAY have a little higher rate (or some other feature that may not be as attractive as a "conventional" loan). Don't get dissuaded by this. Use this loan type. This is the preferred loan type if you are in a partnership with someone on real estate since you will be splitting profits according to your partnership. I'm saying it like this because...
2. A conventional loan (from Fannie Mae or Freddie Mac) will put the loan in your personal name. The property will be in your personal name. That doesn't sound like that big of a difference except that they hold 100% of the payment against you. Even if you have multiple borrowers, ALL borrowers have 100% of the payment held against them. This is a big problem if you are splitting the profits. You'll have 100% of the debt....but only 50% of the profits. It will look like you are taking a loss.
So even though that commercial loan route might seem a little more negative with the rate or prepayment penalty or whatever, that's the route you will want to go.
Now when it comes time to get your own, primary home - going conventional is fine! That's no issue, there's no profits to split or anything like that with your primary home. So going with a traditional loan on your primary home is no problem just as long as that investment property is structured properly.
I hope all of that makes sense.
Thanks for the detailed response Andrew! Much appreciated.
Buying an investment property prior to buying your first home is not a problem.
The lender will give you credit for the rental income on your investment property, which means that the debt associated with that property will have little to no impact on your debt-to-income ratio.
Max DTI ratio is going to be ~45% when you go to buy your primary in SoCal.
If you're making $350k per year, that is $29,166 per month.
Assuming you put 20% down on your new $800k home, and assuming rates are around 6.5%, your mortgage payment will be ~$5,000 per month when you include taxes and insurance (taxes are high out there in SoCal!)
$5,000 / $29,166 = 17.14% front end debt-to-income rate.
Thanks for the insightful response, Scott. I should've probably clarified that the multi-family I'm considering is a duplex, not a commercial property. Would I still be able to get credit for the rental income if that's the case?
Thanks again!
Yes the lender should still give you a credit for the rental income with the duplex.
@Michael Hunt - I would totally recommend that you purchase a rental income property first, and then your personal home. Obviously, you would want to purchase a positive "cash-flowing" rental so that when it comes time to purchase your personal residence, you will have enough DTI to qualify for the mortgage. Heck, if your rental property is cash-flowing significantly, the extra cash may help you qualify for a higher-priced home.